MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE, JULY

UNCLAS SECTION 01 OF 02 MADRID 000859

SIPDIS

STATE FOR EUR/WE AND EEB/IFD/OMA, ENERGY FOR EERE

E.O. 12958: N/A
TAGS: EAIR ECON EINV ELAB ENRG KGHG SP
SUBJECT: MADRID WEEKLY ECON/COMMERCIAL/AG UPDATE, JULY
28-AUGUST 1

REF: MADRID 825

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Table of Contents:

ECON: Economic Growth Barely Positive in Second Quarter
ECON: Inflation Rises to 5.3% in July
ECON/ELAB: Zapatero, Unions, Employers Agree on Social
Compact Principles
ENRG/KGHG: Energy-Saving Measures Announced, Approved
ENRG/EINV: Gas Natural to Buy 45% Stake in Union Fenosa
EAIR/EINV: Iberia in Talks to Merge with British Airways
EINV: U.S. Companies Among Best Places to Work


ECONOMIC GROWTH BARELY POSITIVE IN SECOND QUARTER


1. (U) The Bank of Spain announced July 30 that the economy
grew only 0.1% from the first to the second quarter of 2008,
down from 0.3% growth in the first quarter. The economy has
grown 1.8% since the second quarter of 2007. The bank said
the adjustment in the year,s first half -- particularly
pronounced in private consumption and unemployment -- was
more intense than had been expected. June retail sales were
8% below their level of June 2007. (Note: Unlike U.S.
figures, Spanish quarterly growth figures are not
annualized.) (All Media, 7/31)


INFLATION RISES TO 5.3% IN JULY


2. (U) According to an estimate by Spain,s National
Statistics Institute (INE),inflation reached 5.3% (year on
year) in July. In July of 2007, it was only 2.3%. If the
final rate is the same as the estimate, as it usually is,
this will be the highest rate since 1992. In the inflation
section of its July 30 announcement (see above),the Bank of
Spain noted that compensation increased 4% between June 2007
and June 2008 and criticized the effect automatic salary
adjustments for their inflationary impact. (All Media, 7/31
and 8/1)


ZAPATERO, UNIONS, EMPLOYERS AGREE ON SOCIAL COMPACT PRINCIPLES


3. (U) On July 29, President Zapatero and the heads of
Spain,s major labor unions and business associations signed
a declaration on the guiding principles for the new social
compact legislation to be drafted in the fall. The social
compact process is a longstanding tool used to reach
consensus on key issues such as worker salaries, hiring
guidelines, and unemployment benefits. Although the details
of the new legislation remain to be worked out, the July 29
agreement establishes the guiding principles of creating
jobs, spurring economic growth, and maintaining social
benefits for workers. In a concession to business
associations CEOE and CEPYME, the compact legislation will
also place importance on facilitating easy access to
financing and instituting measures to improve the skill sets
of Spanish workers. (Note: Spain has one of the most rigid
labor markets in Europe as well as low productivity rates.
The social compact process was an opportunity to liberalize
labor requirements, but Zapatero is leaning towards
maintaining the generous benefits that Spanish workers
enjoy). (All Media, 7/30)


ENERGY-SAVING MEASURES ANNOUNCED, APPROVED


4. (U) On July 30, Industry Minister Sebastian announced 31
energy-saving measures for 2008-2011 that were approved by
the Council of Ministers on August 1. The aim is to save the
equivalent of 10% of the country's annual oil imports. The
GOS estimates that the measures will cost 245 million euros
but lead to 4 billion euros in savings. Among the measures
were:

Transportation
- Introducing a pilot project to use electric cars;
- Requiring 20% biofuel use by GOS vehicle fleets in 2009 and
7% overall biofuel use by 2011;
- Granting incentives to retire vehicles older than 15 years
and replace them with efficient vehicles;
- Reducing speed limits by 20% on city beltways and access
roads (Note: we are skeptical this will work);
- Developing by 2012 bus-only lanes on roads;
- Starting buses to take workers from their homes to

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government offices;
- Encouraging use of subways by requiring mobile phone
operators to provide coverage underground and by expanding
weekend operating hours;
- Promoting bicycle use in cities;
- Allowing civilian aircraft to use military air corridors to
reduce flying distances;

Other
- Encouraging the development of energy-saving services
companies;
- Increasing from 60 million to 120 million euros the Energy
Diversification and Conservation Institute (IDAE) budget to
support large companies' energy-saving projects;
- Changing government procurement rules to give preference to
energy efficiency;
- Requiring government buildings to have minimum temperatures
of 79 in summer and maximums of 70 in winter (26 and 21
Centigrade);
- Using some of a 500 million-euro-per-year tourism
renovation fund to finance energy-saving measures at tourist
facilities
- Working within the EU to accelerate to 2012 the elimination
of low-efficiency lightbulbs;
- Giving one high-efficiency light bulb in 2009 and one in
2010 to each household;
- Reducing highway lighting by 50%; and
- Requiring ministries to reduce their first-half 2009
electricity consumption by 10% from first-half 2008 levels.
(All Media, 7/31; Council of Ministers website, 8/1)


GAS NATURAL TO BUY 45% STAKE IN UNION FENOSA


5. (U) Gas Natural, the country's largest natural gas
distributor, announced July 30 it would purchase a 45 percent
stake (7.6 billion euros) in electricity and gas company
Union Fenosa in what will be one of the largest Spanish stock
transactions in recent years. Barcelona-based Gas Natural
will purchase the stake from Spanish construction firm ACS,
which will use the proceeds to pay off debt and seek a
controlling interest in electricity company Iberdrola. (All
Media, 7/31)


IBERIA IN TALKS TO MERGE WITH BRITISH AIRWAYS


6. (U) Spain,s largest airline, Iberia, and British Airways
announced yesterday that that the two companies were in
merger talks which, if successful, would create the third
largest airline in the world. Combined revenues of the two
companies would total 16.5 billion euros, about 60% from BA.
BA and Iberia said that the negotiations would take months to
finalize, but that it was already agreed that both the BA and
Iberia brands would be retained under a combined holding
group. The decision to consolidate comes amidst increasing
energy prices and overall pressures on the airline industry
globally. (Financial Times, 7/30; El Pais, 7/30)


U.S. COMPANIES AMONG BEST PLACES TO WORK


7. (U) Coca-Cola and General Electric are the second and
third best companies to work for in Spain, behind only Banco
Santander, out of 142 that participated in Actualidad
Economica magazine's annual ranking. Coke and GE had the
best scores for employee training and scored well in all
facets of the survey. Other U.S. companies ranked in the top
10 were Kimberly-Clark, Cisco, and EMC. (Actualidad
Economica, 7/25 issue)

Aguirre